Stop Order Trigger Scam?

Discussion in 'Strategy Development' started by Kalculator, Jan 30, 2008.

  1. Hi there, first post; long time lurker.

    I was wondering if a scam like the following can/is be done.

    I bought 1000 shares of stock and placed a stop loss order fairly low at about a 5% drop in price. The stock has very low volume. The stop loss is for the full 1000 shares which was quite large compared to the other lots on the book.

    About 30 minutes later, the price spikes downward to my stop price triggering my stop order and then moves quickly back up to the price it was before; all within about two minutes.

    Could someone, such as the Specialist (it was an AMEX stock) see my relatively huge stop order and clue someone in on it so all someone has to do is sell a small amount of shares to drive the price down momentarily to trigger my order and then subsequently buy my shares?

  2. Yes I think it's possible on low volume stocks with public stop orders for people to come in and buy/sell on both sides of an equity to temporarily push the price down to hit the stops. At least it seems feasible.

    Some brokers let you place hidden stops which seems like a good idea (or conditional orders which gives a similar result).
  3. Low volume.

    I knew a guy who traded for a big mutual fund, and he told me they ALWAYS placed staggered stops for the same reason, they held vast amounts of shares for the low daily trading volume.

    So, you should place staggered stops. Altough you may need to place several orders to purchase, increasing commission costs.
  4. Thanks. I can see how it's the low volume that causes this and contributes to the volatility. Thanks for the tip.
  5. Run the stops. Hope you bought it back. Sometimes you can tell when it's going to happen. But you have to be in tune with what is going on.
  6. Hehe. Welcome to WallStreet.
  7. Ahhhhh, I think I get the game now. Is this correct:

    I notice that this low volume stock will have lot sizes on the book around 100-300, with some large 1000-1300 sizes further out. The market makers seem to adjust these big orders frequently depending on which way the stock's price creeps. I noticed when there are big price movements, the limit orders are updated almost instantly and follow this sudden price spike. I assumed that was just MMs computer trading systems placing orders automatically. But, maybe it's just stop/limit orders kicking-in???

    If they are stop orders, is there a strategy for low volume stocks whereby a trader will try to take advantage of these price swings by guessing how high/low these spikes will be and placing limit orders at these points in the hope that a big buyer's order will trigger stop orders and thereby take advantage of the momentarily low price? So, you could constantly play the high/low spikes. You could have some limit orders a certain distance below and above the current price and wait for a big sell order to drive the price down with the stop orders triggering. Then, after the price stablizes wait for an upward spike and sell the same stock.

    Do I have it right? Is there a name for this "game"/strat?

    Thanks again!
  8. wburrows


    Would this be an issue for trailing stops or stops placed by online brokers? ie. being able to see the stops and work to trigger them?
  9. THERE'S your problem! :p
  10. Exactly. AMEX is notorious for this. It's amazing that the exchange is still around.

    In season one of Wall St Warriors theres a quick shot of the AMEX specialists handling orders, and you can hear them running stops.

    The other thing they do is take forever to execute and/or cancel orders.
    #10     Feb 29, 2008